Which financial statement helps determine solvency?

Which financial statement helps determine solvency?

• A. Income statement
• B. Cash flow statement
• C. Balance sheet
• D. Statement of retained earnings

Answer: (B)

Solvency is about a company’s ability to meet long-term obligations, which depends on actual cash available. The cash flow statement shows how cash moves through the business during a period, breaking it into operating, investing, and financing activities. Positive cash flow from operations indicates the core business is generating cash to service debt and fund obligations, while cash used in investing or financing reveals how cash is being consumed or raised to support growth and leverage. It also converts net income into cash by adjusting for non-cash items, giving a true view of cash generation versus profits. In contrast, the balance sheet is only a snapshot of assets and liabilities at a moment in time, and the income statement shows profitability, not cash flow. So the cash flow statement most directly reveals the cash availability needed to determine solvency.

Solvency is about a company’s ability to meet long-term obligations, which depends on actual cash available. The cash flow statement shows how cash moves through the business during a period, breaking it into operating, investing, and financing activities. Positive cash flow from operations indicates the core business is generating cash to service debt and fund obligations, while cash used in investing or financing reveals how cash is being consumed or raised to support growth and leverage. It also converts net income into cash by adjusting for non-cash items, giving a true view of cash generation versus profits. In contrast, the balance sheet is only a snapshot of assets and liabilities at a moment in time, and the income statement shows profitability, not cash flow. So the cash flow statement most directly reveals the cash availability needed to determine solvency.